Trusts - Testamentary Trusts and the Interests of Beneficiaries

Question 1

Testamentary Trusts

Answer 1

Created by settlor’s will or testament which is created on their death

Question 2

Requirements

Answer 2

• Valid will containing declaration of trust
• Three certainties
• Appropriate trustee
• Perpetuity rules satisfied
• No transfer requirement at time of creation as property will be vested in trustees by PRs after death (contrast with inter vivos trusts)

Question 3

General rule

Answer 3

All terms of trusts must appear in will

Exceptions to rule:

• Secret trusts
• Half secret trusts

These are typically used in situations where testator does not want will to openly benefit someone (e.g. lover or illegitimate child)

Question 4

Secret Trusts

Answer 4

• Trust is not revealed in will
• Beneficiary must prove terms of trust by clear and convincing evidence
• Timing of communication of trust to trustee is irrelevant (i.e. can be before or after will is executed)
• Trust fails if trustee fails to accept it or did not know about it until after settlor’s death (legatee/trustee takes property free from any trust)
• If trustee/legatee failed to respond to the communication acceptance is implied

Question 5

Half secret trusts

Answer 5

• Trust revealed in will but beneficiary not identified
• Communication of beneficiary’s identify must be made on or before will execution
• Will cannot refer to future communication (even if trustee knew of beneficary’s identify before will executed)

If a half-secret trust does fail the law will imply a resulting trust: trustee holds property on trust for the settlor’s estate

Question 6

Fixed trusts

Answer 6

Specific interest of each beneficiary clearly defined

Question 7

Beneficial interests of fixed trust beneficiaries

Answer 7

• Vested interest: no conditions attached to interest
• Contingent interest: condition attached to interest
• Limited interest: no right to trust capital (e.g. life interest)
• Absolute interest: right to capital and income

Beneficiaries can take enforcement action against trustee

Question 8

Discretionary trusts

Answer 8

• Gives trustee discretion about how the trust property is distributed amongst an identifiable class of beneficiaries

Question 9

Beneficial interests of discretionary trust beneficiaries

Answer 9

• No potential beneficiary can take enforcement action against a trustee to insist on receiving a share of the assets or income
• However, anyone who falls into a class of beneficiaries can take action for breach of trust (i.e. if assets are distributed to someone outside the class of potential beneficiaries)

Question 10

Mixed trust

Answer 10

• Includes fixed and discretionary aspects

Question 11

Rule in Saunders v Vautier

Answer 11

Beneficiaries can terminate trust if they:

• Together have absolute interest
• Are adults and of sound mind

If conditions met the trustee must obey the request and transfer the trust property

Cannot be relied upon if one or more of the beneficiaries is a minor

Applies to both fixed and discretionary trusts (although easier for fixed trusts as there are often a large amount of potential beneficiaries of discretionary trusts)